How to get a low-cost mortgage refinance
With mortgage rates still at lows, it’s not surprising that some homeowners want to refinance. By refinancing, it’s possible to lower your mortgage interest rate and payment, creating long-term savings.
It’s important to remember, though, that refinancing means getting a new mortgage to replace your current loan, so there are costs involved. Here are some ways to improve your chances of getting a low-cost refinance.
What is the cost to refinance?
Just as there were costs when you got your first mortgage, there are costs that come with refinancing. If you want a low-closing cost refinance, it’s important to understand what expenses you might be on the hook for.
- Loan origination fee
- Appraisal fee
- Survey fee (if needed to determine property boundaries)
- Credit report fee
- Title fee (including search and insurance)
- Discount points
Depending on your lender, you might be able to have some of these waived. Your lender has to provide you with complete information on the fees in your loan estimate. You can also find out which fees are negotiable.
How to get a low-cost refinance
When getting a low-cost mortgage refinance, there are some steps you can take to pay the fewest fees.
1. Get the lowest possible rate
Qualifying for the lowest possible mortgage refinance rate is one of the best ways to save money long-term. Here are some tips for ensuring that you’re likely to get the most favorable rate:
- Review your credit report. Take a look at your credit report to make sure there aren’t errors. Fixing mistakes can help you boost your score.
- Improve your credit score. Reduce your debt-to-income ratio or make on-time payments to improve your credit score so you’ll be eligible for the best rates available. Having a smaller amount of other debt can qualify you for a better interest rate when your refinance. See if there are some loans you can pay off or credit cards you can pay down.
- Build your savings. If possible, add to your savings. With more savings, you might be seen as less of a risk, and score better rates as a result.
- Choose your loan term wisely. A shorter loan term usually means a lower rate but often a higher monthly payment. If you can afford the higher payment on a 15-year refinance, you might be able to get a better interest rate than what you’d receive with a 30-year term.
- Organize your paperwork. Know exactly where you stand, what paperwork you need and what to expect. When you’re organized, you’ve got more information and you’re in a better position to negotiate.
- Compare rates online. Take a look online to see what mortgage refinance rates are available. This can give you an idea of what to expect. Be sure that you’re comparing the annual percentage rate, or APR, on offers, since this includes other fees related to the mortgage. The advertised interest rate doesn’t include these extra fees, and that can impact your costs.
- Lock in your rate. When getting approval, see if you can lock in your mortgage rate. Lenders might be willing to let you lock in a low rate, and allow you to take advantage of even lower rates if they fall further. Locking in your rate can help protect you against increases as long as the transaction closes within a set period of time.
2. Consider a no-closing-cost refinance
One way to get a low-cost refinance is to avoid closing costs altogether. With a no-closing-cost refinance, you avoid paying upfront fees, and that can save you money.
However, you need to make sure you understand whether your lender is actually waiving your closing costs or simply shifting some of the fees. There are two main ways that no-closing-cost refinances work to help you avoid paying a lump sum upfront:
- Higher interest rate – Your lender might charge you a higher interest rate to make up for the no-closing-cost refinance. The lender still ends up recovering what you would have paid in closing costs because you’re paying more in interest.
- Roll it into the principal – The lender can add the closing costs to your loan balance. This increases your balance, but prevents you from needing to come to the closing with cash.
In both cases, while you might not be paying upfront closing costs, it still costs you in the long run. Both of these scenarios result in paying higher interest costs over time, either because of the higher rate or because you’re paying interest on a higher principal amount.
A no-closing-cost refinance can work well if you won’t stay in the home for very long. With a loan like this, the costs can add up to much more than the original closing costs if you keep the loan for another 15 to 30 years. In general, a good rule of thumb is to consider a no-closing-cost refinance if you plan to be out of the house within five years.
3. Compare mortgage lenders
You are not required to refinance with your current lender, and you can get a better mortgage rate simply by shopping around with multiple lenders. In fact, a study by Freddie Mac found that borrowers could save an average of $1,500 over the life of a mortgage if they got one extra quote, and $3,000 if they got quotes from at least five lenders. If you get an attractive quote from one lender, you could have leverage with the next.
4. Consult with your lender
If you want a low-cost mortgage refinance, you can also try negotiating your closing costs with the lender. Certain fees might be able to be reduced or waived, so ask if there are discounts or waivers available. Sometimes, if you’re already a borrower with the lender, or if you can show some other compelling reason (like you’ll choose another lender with a better offer), you might be able to get a break on closing costs.
How to calculate if refinancing is worth it
Whether refinancing is worth it depends on your individual situation as well as the numbers. However, it’s not just about getting a low-cost refinance or avoiding upfront closing costs. How long you’ll be in the home and your own preferences play a role in the decision, too.
You can use a mortgage refinance calculator to determine your total costs and how much you’ll pay over the long and short terms. If you can save on overall costs before you plan to move out, it might be worth the cost, and even be a net benefit if you do a no-closing-cost refinance.
If you have longer-term plans, refinancing can be worth it because you can save so much on interest and payments, but it might make more sense to pay your closing costs upfront in a lump sum, rather than getting a no-closing-cost loan that increases the interest you pay.
Run the numbers and consider your circumstances to make the choice that works best for you.
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